When a business owner decides to sell their company, they typically imagine, on the other side of the table, a private equity fund with a team of analysts, a strategic competitor with financial muscle, or a family office. Few anticipate finding themselves across from a search fund.<\/p>\n
In recent years, however, this acquisition vehicle has gained a notable presence in the Spanish and European market for lower-mid-market transactions \u2014the segment with EBITDA of between \u20ac500,000 and \u20ac3 million, with the bulk of deals concentrated between \u20ac0.5 and \u20ac2 million\u2014, historically the most difficult to divest from due to the lack of active institutional buyers. The search fund has come to fill precisely that gap.<\/p>\n
For an owner contemplating an exit or a generational transfer, understanding how this type of buyer operates, what its economic logic is, and what the implications of negotiating with one are is as important as knowing the value of their own company. Doing so without that understanding is the equivalent of sitting down to negotiate without having read the rules of the game.<\/strong><\/p>\n This article is a practical guide for owners and management teams who find themselves \u2014or may find themselves\u2014 facing a proposal of this kind. It addresses the structure of the vehicle, the buyer profile, the particularities of the negotiation, the most common mistakes, and the contractual elements that determine the real price the seller receives.<\/p>\n A search fund is an investment vehicle created by one or two entrepreneurs<\/strong> \u2014typically with a top-tier MBA and between five and ten years of professional experience\u2014 with the exclusive purpose of identifying, acquiring, and managing a single company over a five-to-seven-year horizon.<\/strong><\/p>\n The model originated at Stanford University in the 1980s and has been systematized and studied with academic rigor by Harvard Business School, which periodically publishes return statistics on the model. The historical data is consistently attractive: the average return on invested capital exceeds that of most mid-market buyout strategies. That profitability is no accident; it is a direct consequence of the alignment of incentives between the entrepreneur-manager and their investors.<\/p>\n In exchange, search-phase investors obtain a preferential right to participate in the acquisition under favorable economic terms: typically a 20\u201330% discount on the price at which new investors enter in the acquisition round, and in some models, an additional stake in the searcher’s carry.<\/p>\n The holding horizon is five to seven years, after which a sale takes place \u2014to a larger fund, to a strategic buyer, or to another search fund\u2014 that crystallizes the return on the transaction.<\/p>\n What distinguishes a search fund from a conventional private equity fund is not only the size of the transaction, but the nature of the buyer. In classic private equity, the fund manager is an investment professional whose career is built on asset turnover and portfolio management. The CEO who will run the acquired company is a subsequent hire.<\/p>\n In a search fund, the searcher is the future managing director of your company. They do not buy to resell quickly; they buy to run. Their incentives are aligned with the long-term operational performance of the company, not with the speed of capital turnover.<\/strong><\/em><\/p>\n This difference has concrete practical implications for the seller: the searcher will place particular value on the transfer of knowledge, the stability of the management team, and the quality of relationships with customers and suppliers. And they will be willing to invest real time in understanding the business before closing the transaction.<\/p>\n Not all searchers operate under the same model, and the difference is relevant for the seller. In the traditional search fund, the entrepreneur raises institutional capital \u2014funds of funds specialized in search funds and professional investors\u2014 from day one, both to fund the search and to back the subsequent acquisition. In the self-funded model, by contrast, the entrepreneur finances the search with their own resources and does not seek investors until they have a specific company on the table.<\/strong><\/p>\n The self-funded model has grown very significantly in recent years, including in Spain. Why it matters to the seller: the traditional searcher has consolidated institutional backing from the outset, which lends solidity to the process and greater certainty of closing. The self-funded searcher tends to rely to a greater extent on bank debt and local investors brought in at the last minute, which can substantially alter the capital structure of the transaction and the real execution risk. It is advisable to ask from the outset which model the buyer operates under and what degree of capital commitment they have effectively secured.<\/strong><\/p>\n The profile of company that attracts a search fund is not arbitrary; it responds to a well-defined investment thesis that combines criteria of risk, improvement potential, and leverage capacity. Understanding those criteria allows the seller to anticipate interest and, more importantly, to identify the points on which the buyer will focus their attention during due diligence.<\/p>\n Equally important is understanding what drives a search fund away from a deal:<\/p>\n The searcher and their investors carry out rigorous due diligence; any hidden risk will eventually surface and, if it does so after signing, will generate contractual disputes.<\/p>\n The searcher acts with subjective urgency<\/strong> \u2014they have been searching for one to two years, their capital is consumed month by month, and the pressure from their investors is real\u2014. This urgency may lead the seller to believe they have a buyer with rapid decision-making capacity. This is a common mistake.<\/p>\n Approval of a transaction requires validation by the investor syndicate.<\/strong> There is no centralized investment committee with executive power; there are between 15 and 30 individuals \u2014with their own agendas, analyses, and timelines\u2014 who must review the deal, ask questions and, in most models, give their explicit approval before the searcher can commit capital. This process can delay closing by weeks or months beyond what was expected.<\/p>\n Practical implication:<\/strong> Establish clear contractual milestones in the Letter of Intent: a deadline for completing due diligence, a deadline for signing the SPA, and an estimated closing date. Include penalty or break clauses if the process drags on without justified cause.<\/p>\n Search funds do not have unlimited capital. The transaction is financed with a combination of equity raised from investors and bank debt, the proportion of which depends on the company’s profile, the level of EBITDA, and credit market conditions at the time of closing.<\/strong> In current transactions in the Spanish market, bank leverage typically ranges between 2.5x and 4x EBITDA.<\/p>\n This structure has direct implications for the seller.<\/strong><\/p>\n The earn-out is a legitimate tool when used to bridge a valuation gap between buyer and seller<\/strong>; it is an abusive mechanism when designed so that the seller has little prospect of collecting it. The difference between the two scenarios lies in the contractual details, not in the agreed nominal amount.<\/p>\n Search funds apply standard M&A valuation methodologies<\/strong>: multiples on adjusted EBITDA (the most common in this segment), discounted cash flow, and comparable transaction analysis. Typical multiples in lower-mid-market transactions in Spain currently range between 4x and 7x EBITDA, with significant variation depending on sector, recurrence, growth, and the quality of the team.<\/p>\n The tension is usually not in the multiple stated in the Letter of Intent, but in how the calculation base is defined.<\/strong>Adjustments to EBITDA \u2014owner’s compensation above or below market, personal expenses booked as corporate, non-recurring investments, restructuring costs\u2014 can move adjusted EBITDA by between 15% and 30% relative to accounting EBITDA. That difference, multiplied by the agreed multiple, is price.<\/p>\n A seller who accepts the multiple without negotiating the calculation base may be leaving between \u20ac300,000 and \u20ac800,000 on the table in a mid-market transaction. The work of adjusting EBITDA is as important as the negotiation of the multiple.<\/strong><\/em><\/p>\n It is also worth recalling a distinction that gives rise to much of the post-LOI conflict: the multiple is applied to the Enterprise Value, but what the seller actually takes to the bank is the Equity Value, which results from adding cash and subtracting financial debt. In the SME segment, the greatest source of tension is usually not the multiple, but the definition of Net Cash \/ Net Debt and, above all, of Normalized Working Capital.<\/strong><\/p>\n Many transactions stall because the seller does not understand why part of the price is withheld to guarantee a “normal” level of operating working capital at the time of closing. Negotiating, at the level of each accounting line item, which items are debt, which are cash, and what the reference working capital is, is as decisive for the effective price as the multiple itself.<\/p>\n In a transaction with a search fund, the founder’s stay-on period is not a formality; it is a structural condition of the investment thesis. The searcher needs to absorb the institutional knowledge, the relationships with strategic customers, the internal culture, and the technical know-how. Without that transfer, post-closing operational risk is unacceptable for the investors.<\/strong><\/p>\n What the seller must demand is that this period be well defined contractually. Ambiguity on this point invariably generates conflicts: what is the founder’s real role vis-\u00e0-vis the new CEO? Do they have authority over the team? Can they make operational decisions? What is their compensation? What happens if there is disagreement with the new manager about the direction of the business? A well-drafted Transition Services Agreement (TSA) avoids these frictions.<\/p>\n A searcher who makes contact, visits facilities, and requests financial documentation has not made a binding offer. They have initiated an evaluation. Many owners, faced with the searcher’s enthusiasm and the implicit pressure of a process that is moving forward, share margins by customer, cost structure, and key contracts before having a solid confidentiality agreement signed and, above all, before receiving a Letter of Intent setting out the basic economic terms.<\/p>\n Information shared before the LOI is information that, if the deal does not close, has been transferred free of charge to someone who can use that knowledge in multiple ways. This is especially relevant in niche markets where the base of competitors or alternative buyers is small.<\/p>\n The searcher has spent 18 to 24 months preparing for this negotiation. They know precisely the sector’s valuation metrics, the usual deal structures, the clauses that are typically conceded and those that are not, and the arguments that will weaken the seller’s position. The owner who has run their company for decades \u2014and who is probably facing the only M&A transaction of their life\u2014 starts from a structural disadvantage if they do not have specialized advice.<\/p>\n An M&A financial advisor not only helps to maximize the price; they structure the process so that the seller negotiates from a position of strength, manage the timeline to prevent the seller from becoming trapped in long exclusivity periods, identify hidden risks before the buyer uses them, and ensure that what is agreed verbally is reflected in the contract. In cost-benefit terms, it is the investment with the highest return in any sale process.<\/p>\n The companies that obtain the best terms in a sale process are those that began their preparation 12 to 24 months before the process started.<\/strong> That preparation includes: organizing the corporate and tax structure, normalizing the owner’s compensation to market levels, documenting key operational processes, reducing customer concentration where possible, resolving latent contingent liabilities, and demonstrating a sustained growth trajectory over recent financial years.<\/p>\n A disorganized company not only receives lower offers; it receives offers with more negative EBITDA adjustments, more aggressive warranty clauses, and more conditions precedent. Prior order is, in practice, price.<\/p>\n Not all search funds are alike. The solidity of the investor syndicate backing the searcher \u2014their sector experience, their track record of completed deals, their ability to add operational value to the new manager\u2014 largely determines the real probability that the transaction reaches closing and that the company performs well afterward.<\/p>\n Before signing an exclusivity agreement or a binding LOI, the seller should request active references: speak with owners who have sold to that searcher or to deals managed by their investor network. The information exists; it must be sought out.<\/p>\n The earn-out is the clause that generates the most conflict in M&A transactions with search funds. A poorly designed earn-out turns part of the price into an option that the buyer has the power not to exercise. The seller’s protection mechanisms \u2014a closed accounting definition, limits on the new manager’s discretion during the measurement period, audit rights, acceleration of the earn-out in the event of an early sale\u2014 are not abusive demands; they are basic conditions of a balanced deal.<\/p>\n Due diligence confirms or discards the investment thesis. The negotiation of the Share Purchase Agreement (SPA) determines who assumes which risks and on what terms. For the seller, the SPA is the document that turns the agreed nominal price into the real price effectively collected.<\/strong><\/p>\n The following clauses deserve special attention in transactions with search funds:<\/strong><\/p>\n <\/p>\n In a transaction of this nature, the financial advisor specialized in M&A plays a role that goes well beyond preparing a valuation report. Their functions span the entire transaction cycle:<\/strong><\/p>\n Rigorous analysis of EBITDA adjustments and construction of the value narrative the seller will present to the buyer and their investors. Preparation of the Information Memorandum with the level of detail and depth required by an audience of professional investors accustomed to analyzing private equity transactions.<\/p>\n If the seller has the capacity to generate more than one offer \u2014whether from other search funds, strategic buyers, or private equity funds\u2014, the advisor manages the competitive process so that offers can be compared on equal terms and so that the existence of alternatives strengthens the seller’s negotiating position.<\/p>\n Direct liaison with the searcher’s team and their financial and legal advisors, defense of the EBITDA adjustments, structuring of the offer, and negotiation of the economic terms of the SPA. The advisor acts as the seller’s technical shield, allowing them to maintain a constructive personal relationship with the buyer while the difficult aspects of the negotiation are handled at a technical level.<\/p>\n Analysis of the SPA from an economic and financial perspective: the impact of the price adjustment clauses, the economic scope of the representations and warranties, the design of the earn-out mechanisms, and coordination with the legal advisor on all aspects with economic implications.<\/p>\n In transactions with an earn-out, the advisor’s role may extend through to the final settlement of the price, overseeing the calculation of the agreed indicators and representing the seller’s interests vis-\u00e0-vis the new manager in the event of a discrepancy.<\/p>\n Search funds represent a real and growing opportunity for owners of medium-sized companies seeking a buyer committed to the long term, with a genuine willingness to grow the business and the capacity to execute transactions in a market segment where traditional institutional buyers are rarely present.<\/strong><\/p>\n But opportunities do not automatically translate into good deals. The difference between a transaction that maximizes value for the seller and one that erodes it does not lie in the type of buyer: it lies in the quality of the preparation, in the solidity of the advice, and in a deep understanding of the mechanisms that determine the real price.<\/strong><\/p>\n A well-financed searcher, backed by experienced investors and with a clear value thesis, is an excellent buyer. An owner who comes to that negotiation prepared, advised, and with a rigorous analysis of the value of their company is the only one who can guarantee that the deal is as good for them as it is for the buyer.<\/p>\n To all the technical analysis, it is worth adding a factor that appears in no valuation model but proves decisive: the chemistry with the searcher.<\/strong> Unlike a traditional fund, this buyer is going to sit in the founder’s office and live alongside their employees, their customers and, very often, the seller themselves during the transition period. The owner is not only handing over a company: they are handing over the keys to a project to which they have probably dedicated a good part of their life.<\/p>\n Assessing the human and managerial quality of the searcher \u2014their maturity, their capacity to listen, their fit with the company’s culture\u2014 is not an emotional luxury, but a critical success factor that conditions the transition, the continuity of the team and, in transactions with an earn-out, the very collection of the deferred price.<\/p>\n At Maraz Corporate Finance, we have extensive experience defending the interests of owners against institutional buyers and structuring optimal transactions<\/a>. If you have been approached by a Search Fund or are planning the handover of your company, contact us for a preliminary valuation session with no obligation.<\/strong><\/p>\nWhat a Search Fund is: Structure and economic logic<\/h2>\n
The two phases of the model<\/h3>\n
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The structural difference from traditional private equity<\/h3>\n
Traditional Search Fund vs. Self-Funded Search<\/h3>\n
Why Search Funds are looking at your company<\/h2>\n
Common selection criteria<\/h3>\n
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What the searcher is not looking for<\/h3>\n
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Key differences in the negotiation<\/h2>\n
The speed of decision is not what it appears<\/h3>\n
The financial structure and its implications for the seller<\/h3>\n
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Valuation: Where the real tension is concentrated<\/h3>\n
The Transition Period: An operational variable, not a formality<\/h3>\n
The most common mistakes when selling to a Search Fund<\/h2>\n
1) Disclosing sensitive information without contractual protection<\/h3>\n
2) Negotiating without independent financial advice<\/h3>\n
3) Not preparing the company sufficiently in advance<\/h3>\n
4) Underestimating the Investor syndicate’s due diligence<\/h3>\n
5) Accepting an Earn-Out without negotiating its protection mechanisms<\/h3>\n
Key contractual aspects of the share purchase agreement<\/h2>\n
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\n Clause<\/strong><\/th>\n Technical term<\/strong><\/th>\n What to negotiate and why<\/strong><\/th>\n<\/tr>\n<\/thead>\n\n \n Reps & Warranties<\/strong><\/td>\n Representations and warranties<\/em><\/td>\n Define the material scope (tax, labor, environmental), set the maximum liability cap \u2014typically between 15% and 30% of the price\u2014 and negotiate a survival period differentiated by risk category (18 months for operational, up to 5 years for tax).<\/td>\n<\/tr>\n \n Adjusted purchase price<\/strong><\/td>\n Locked Box mechanism vs. Completion Accounts<\/em><\/td>\n Under the locked box mechanism, the price is fixed at a historical balance sheet date and controlled through leakage; under completion accounts, it is recalculated at closing. The seller usually prefers locked box for price certainty. In both cases, the definitions of cash, financial debt, and normalized working capital are critical and must be negotiated at the accounting line-item level.<\/td>\n<\/tr>\n \n Earn-out<\/strong><\/td>\n Contingent consideration<\/em><\/td>\n Negotiate the calculation base (EBITDA, EBIT, or revenue), the measurement period (12\u201324 months post-closing), the applicable accounting, the limits on the new manager’s discretion regarding investments and expenses, and the seller’s inspection rights. Without these safeguards, the earn-out is uncollectable.<\/td>\n<\/tr>\n \n Stay-on period<\/strong><\/td>\n Transition Services Agreement<\/em><\/td>\n Set the duration (typically 6\u201318 months), monthly compensation, scope of functions, real authority vis-\u00e0-vis the new CEO, and grounds for early termination. The seller must avoid being left in a position of subordination without adequate consideration.<\/td>\n<\/tr>\n \n Non-compete<\/strong><\/td>\n Restrictive covenants<\/em><\/td>\n Limit the geographic scope to the territory where the company operates, the sector scope to directly competing activities, and the duration to a reasonable maximum (2\u20133 years). Excessively broad clauses may prove unenforceable and generate litigation.<\/td>\n<\/tr>\n \n Conditions precedent<\/strong><\/td>\n Conditions precedent<\/em><\/td>\n Reduce to the strictly essential: bank financing (ideally already committed before the SPA), obtaining consents for contracts with change-of-control provisions, and regulatory approvals where applicable. Every pending condition is time and risk for the seller.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n The role of the financial advisor in a transaction with a Search Fund<\/h2>\n
Preparation and positioning<\/h3>\n
Management of the competitive process<\/h3>\n
Technical negotiation<\/h3>\n
Financial review of the SPA<\/h3>\n
Post-Closing support<\/h3>\n
Conclusion: Preparation defines the outcome<\/h2>\n